Wednesday, March 28, 2007

Bernanke Speaks

WASHINGTON (MarketWatch) -- Despite heightened risks from the contraction in housing and the slump in manufacturing, the U.S. economy will most likely achieve moderate growth this year with gradually slowing inflation, Federal Reserve Chairman Ben Bernanke said Wednesday.

"Overall, the economy appears likely to continue to expand at a moderate pace over coming quarters," he said. He doesn't see a recession coming this year.

In prepared testimony to the congressional Joint Economic Committee, Bernanke expanded on the Federal Open Market Committee's statement from last week's meeting, when the committee held interest rates steady.

Bernanke was as explicit as I think it's possible to be about how he views the economy, given that he doesn't know what's going to happen in coming weeks and months. On inflation:

In response to a question, Bernanke explicitly said the committee is still focused more on fighting inflation, even though "risks had increased on both sides." One big risk: "core inflation remains uncomfortably high." However, core inflation "seems likely to moderate gradually over time," he said.

And on the housing market, and slowing economic growth:

"Thus far, the weakness in housing and in some parts of manufacturing does not appear to have spilled over to any significant extent to other sectors of the economy," he said. The Fed chief identified several downside risks to his benign outlook, including the "substantial correction in housing," which could lead to severe financial problems for many individuals.

"The implications for these developments for the housing market as a whole are less clear," he said. "The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

...A slowing in capital spending is another risk, heightened by the February durable-goods orders report, which showed further slowing in capital equipment orders. "Despite the recent weak readings, we expect business investment in equipment and software to grow at a moderate pace this year," he said.

Personally, I think Bernanke really does try to say what he thinks. The only reason that observers might feel differently is that Bernanke doesn't give the markets the information that they really care most about: namely, when will the Fed next raise or lower interest rates? And of course, the reason he doesn't give the markets the answer to that question is primarily because Bernanke himself doesn't know.

Contact

The Street Light is written by economist Kash Mansori, who works as an economic consultant (though views expressed here are entirely his own), writes whenever he can in his spare time, and teaches a bit here and there. You can contact him by writing to the gmail account streetlightblog. (More about Kash.)